The European Central Bank’s (ECB) April monetary policy meeting reinforced the consensus among most Governing Council (GC) members to hike interest rates by 25 basis points at its next projections meeting on June 11.

The continuation of the blockade of the Strait of Hormuz and the damage done by Iran to energy infrastructure in Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE have rapidly boosted energy prices in the euro area, and this is spreading to industrial products.

Bottom Line: The ECB is leaning towards a rate hike at its next policy meeting on June 11. The persistence of the US-Iran conflict and the blockade of the Strait of Hormuz is contributing to rapidly higher energy and headline inflation, which is boosting consumers’ inflation expectations and firms’ price selling expectations. President Lagarde signaled again today the duration of the conflict will be a key factor. Only a rapid peace deal and lower commodity prices could avoid a hike in June. 

Final Thoughts Ahead of the FOMC

We have been anticipating that the Fed will not update the FOMC statement language tomorrow to eliminate the suggestion that the next move is a rate cut, even though the growing sentiment among FOMC members is that the Fed won’t cut rates again this year. That still holds.

Bottom Line: Assuming the Fed retains its existing guidance, Powell will likely sound hawkish relative to that guidance and make clear that rate cuts are not being considered anytime soon. Note that by pushing through cuts last year, Powell reduced the scope for Warsh to cut rates further and, even worse for Warsh, if the Fed made a policy error by cutting rates last year, Powell set Warsh up to hike rates. Needless to say, such a turn of events wouldn’t please President Donald Trump.

Monday Morning Notes, 4/27/26

If You Don’t Have Time This Morning

Powell will likely stay at the Fed as governor for at least some after his term as Chair ends.Journalists will press Powell to disclose plans for when his time as Chair ends next month. Tillis will drop his blockade against Warsh’s nomination, allowing Warsh to ascend to the helm of the Fed. Although Tillis sees the investigation as “fully and completely ended,” he also acknowledged that Powell may want to stay until the DOJ at least finishes the appeal process, seemingly an implicit acknowledgement that Powell will stay. Powell could also choose to wait until the Fed’s inspector general completes its report.

Over European Central Bank (ECB) officials are stressing they need more time to assess the economic impact of the Strait of Hormuz crisis on the euro area economy. Most Governing Council (GC) members agree the ECB should not rush to increase interest rates, highlighting the central bank is well-positioned to respond to the energy shock and can afford to adopt a wait-and-see strategy.

In the press conference following the monetary policy meeting on April 30, we expect ECB President Christine Lagarde will continue conveying it is too soon to determine the shock’s magnitude and persistence, and therefore premature to implement an interest rate hike. Lagarde will add that uncertainty remains high and that the GC will stick to its meeting-by-meeting approach, keeping the door open, but not committing to a rate hike in June.

Bottom Line: At this point, the length of the US-Iran conflict is the key determinant of the ECB’s interest rate path. A rapid resolution, and lower energy prices in the context of a weakened economic outlook would make a rate hike in June less likely. In contrast, the resumption of hostilities and the continued blockade of Hormuz would make a hike almost unavoidable.

Araghchi maintained that given the Trump administration’s “complete lack of credibility” and the significant differences between Iran and the US on issues such as nuclear, the Strait of Hormuz, and reparations, the second round of talks is unlikely to yield substantial results. The only possible, and perhaps best-case, outcome is for both sides to extend the negotiation period again, perhaps for another two weeks. [Note — We are not sure if this would trigger another round of strikes by Trump, but suspect it will depend on the tenure of the negotiations].

Between acknowledgement that the breakeven pace of job growth has fallen to zero and the Iran war, Fed doves have moved toward hawks and delayed any expectations of rate cuts until later this year. While Fed hawks might see the case for two-sided risks to policy rates, doves still see the risks as one sided. We don’t see Fed doves as willing to seriously consider risks as two-sided until they see a more durable turn in the labor market. While we see the possibility for such a turn, it’s not yet evident in the top line data in a way that would be convincing to Fed doves.

Bottom line: The Iran-driven oil shock is likely to prompt further near-term tightening, with a May hike and the potential for one additional move later in the year. Though inflation may spike toward 5-6% in the near term as structural factors may keep it closer to 3% over the medium term, the largely supply-driven nature of the current shock and concerns about demand destruction will limit RBA tightening to what is necessary to anchor expectations rather than see the Bank embark on a prolonged hiking cycle.

The second important implication is that the dispute today over whether the cease-fire includes Israel’s attacks on Hezbollah in Lebanon, which have continued and led to Iran halting the passage of ships through Hormuz, may be in the rear-view mirror sooner rather than later, despite the hard anti-Israel rhetoric emanating today out of an emboldened leadership in Iran.

We are not sure how this is resolved but assume the massive step up overnight of Israeli attacks on Lebanon reflects a desire to create as much of a buffer space on the border before the US weighs in to curtail further strikes.

The Bank of Canada (BOC) is more likely to remain on hold this year than to deliver rate hikes, despite market pricing implying almost 50 basis points of tightening over the course of 2026.

To be fair to markets, that pricing reflects elevated oil-related risk premia and is, in part, a spillover effect from tighter global financial conditions.

But Canada’s domestic macroeconomic challenges have not materially changed so the bar for tightening is high. We expect the Bank to continue to push back against premature rate hike expectations.

As relayed from Beijing:

To prevent the ongoing US-Israel war against Iran from escalating into a regional war or even drawing in China, Russia, and European nations, Beijing and Moscow have recently engaged in intensive diplomatic consultations regarding the situation in the Middle East. China’s president Xi Jinping and Russia’s president Vladimir Putin have each, through special channels, attempted to persuade US President Donald Trump and Iran’s new Supreme Leader Mojtaba Khamenei to implement an immediate ceasefire and return to the negotiating table.

The strongest signals Xi and Putin sent to Trump and Khamenei were, respectively, do not launch a ground war against Iran, and do not close the Strait of Hormuz.

The Fed finds itself in a policy bind of its own making, having misjudged both the resilience of the labor market and the persistence of inflation, errors compounded by cutting rates too aggressively in 2025. With the March jobs report showing continued labor market strength and inflation running well above target, rate cuts are effectively off the table for the foreseeable future, with SGH assigning a limited probability to a cut in 2026.

Bailey is trying to anchor the Committee around “patience,” and has noted that “the right place to be is on hold” while cautioning against “reaching any strong conclusions about us raising interest rates.”

He’s saying the Bank’s bias is to sit tight at least through the April 30 projection round meeting, and that the bar for tightening is high.

That’s in stark contrast to the Bank’s stance prior to the conflict when it was on the precipice of resuming rate cuts to deal with falling activity and weak labor.

European Central Bank (ECB) officials are squarely focused on assessing the medium-term impact of the ongoing energy crisis on euro area inflation. Beyond the length of the war, and its impact on key infrastructure, the Governing Council’s (GC) rate path will be determined by the passthrough of higher commodity prices to headline inflation, and the second-round effects it could trigger through higher wages.

The latest surveys assessing businesses’ price selling expectations, consumer inflation expectations, and input and output costs all signal the damage already done has been enough to alter the behavior and expectations of all key economic actors. This was further confirmed yesterday by the euro area March flash inflation reading, which shows headline inflation is expected to have risen from 1.9% in February to 2.5%, the highest level since June 2024.

This will require the ECB to tighten its monetary policy, and June remains the baseline scenario for a 25bps rate hike. Most officials think that hiking in April would be too hasty because while inflationary pressures are mounting, interest rates are already at neutral, inflation has been on target for a year, and inflation expectations up until last month were firmly anchored.

Bottom Line: The Fed is stuck in a “wait and see” mode as the inflationary consequences of the Iran conflict push discussion of rate cuts not just to the back burner, but off the stove entirely. The Fed, however, would need to see a hotter labor market, and with that the threat of second order impacts on inflation from the oil shocks, before a discussion of rate hikes can begin in earnest. 

The US-Israeli war with Iran is unlikely to deter the Bank of Japan (BOJ) from nudging its policy rate to 1% at its April 27-28 meeting, despite topline slower inflation in February and the detail from the BOJ’s January policy meeting that showed Board members still agonizing over whether to declare inflation at target.

We’ve repeatedly written that the April meeting remains fully live for a 25 basis-point increase to 1%, and that we expect the BOJ will consider another move likely in July as well as a possible third move later this year (see SGH 2/24/26; “BOJ: Reported Caution Won’t Block April Hike”).

Though the timing of rate moves subsequent to April has been thrown into flux by the Middle East conflict, which sent oil prices surging, the BOJ will be even more keen to prevent energy costs from seeping into inflation expectations.

There is not yet convincing evidence that the labor market is deteriorating. Absent such deterioration, the Fed will be challenged to cut policy rates when inflation is running well above target year after year. That said, labor market data is neither unambiguously strong nor weak. On the “good news” side of the ledger is near-steady labor demand as measured by job openings, steady jobless claims indicating layoffs remain low, and ongoing wage growth above the pre-pandemic pace. On the “bad news” side of the ledger is weak and narrow job growth, a steady to slowly rising unemployment rate, a continued low job-finding rate, dour worker perceptions of the labor market, and an indication that payrolls last summer were overstated.

The Bank of England’s (BOE) threshold to a rate hike is high and only if there are signs of energy-driven inflation feeding into expectations and wage-setting behaviour would the Bank hike rates, in June or August.

In a clear gesture to its inflation mandate, the Monetary Policy Committee (MPC) set aside its pre-Iran majority preference to cut rates, and voted unanimously to pause policy at 3.75% where it will likely stay for some months.

Members don’t want to hike but they will if inflation dynamics worsen in a persistent way.

While tightening remains conditional on clear evidence of inflation persistence, to us, the balance of risks suggests a hike may ultimately not be required if the energy shock proves temporary and second-round effects fail to materialize.

Powell will be challenged to strike a dovish tone in the press conference. Rising energy prices will only further antagonize Fed hawks, who at the January FOMC meeting argued in favor of a statement that emphasized two-sided risks to the outlook. Powell downplayed any discussion of rate hikes at the January press conference, but journalists can push the question more directly this week. Powell will likely stress that with policy near neutral it is well positioned to manage the risks to both sides of the Fed’s mandate, although presumably that means hiking rates if necessary.

We expect only one dissent. We think rising oil prices provide space for both Governor Chris Waller and Vice Chair of Supervision Michelle Bowman to support holding policy despite their concerns about the job market. It’s one thing to look through higher headline inflation and not hike rates. It’s another thing to cut rates into higher headline inflation with core inflation above 3%. That’s just like embracing the 1970s. Similarly, reverse engineering an inflation forecast to maintain a one cut baseline in the SEP is also like embracing the 1970s. We expect Governor Stephen Miran to dissent. When you only have a hammer, everything is a nail.